Wednesday, July 27, 2005

The coming IPO frenzy

There are about 15 IPOs due to hit the UAE in the coming months. Shuaa has some interesting commentary:

Shuaa Capital Insight, July 2005

Pulling Liquidity

The two most active markets in terms of capital raising in the Gulf region today, areby no coincidence the two best performing and most liquid; Saudi Arabia and the UAE. The latter market in particular is slated to see no less than 10 capital raising exercises over the next three months through rights issues and IPOs. The total amount of liquidity that will be raised will amount to nearly USD 9 billion. This liquidity will be directly sourced from the same pool that has been fueling the UAE market to record gains of over 100% in 2005 to-date alone. This amount represents around 6% of the market's total market capitalization, or more importantly 12% of the market's approximate free-float market capitalization, which is by most estimates already burdened by relatively high degree of leverage. It corresponds to around 22 days of average trading levels on the exchanges. It also corresponds to around 13% oftotal bank deposits and 14% of money supply in the country as at the end of 2004. It is a substantial amount that will probably have an immediate and profound effect on the liquidity available to the market. It may even be the elusive trigger we have been anticipating for a market-wide correction, which from a valuations perspective is overdue. On the other hand, oil prices have reached a new record high recently, exceeding the USD 60 per barrel barrier. Trying to determine the net effect of these two contradicting factors on the liquidity in the market is difficult. The effect of higher oil prices has a more long term impact on liquidity, as it typically takes six months to a year to filter through to markets, with its short-term impact on the market limited to a boost in general sentiment and expectations. The anticipated capital draw will have a more immediate impact, and coupled with regular increases in interest rates, may result in a correction in the short to medium term, in which we expect the market to give up around 20% of its value at the peak. The long-term direction of the market will be determined by the rate at which this liquidity is replenished.

I'm very curious about whether Shuaa – whose straight-talking, pithy analysis has made them my favourite investment bank of the moment – has taken into consideration the overvaluation of the property market in the UAE.

A stock market correction of about 20% would be painful, but if it cascaded into a property market crash it could be excruciating.